January 26

Trading Strategy RS27 – Jan 26th 2015 Update


To Recap…

We’re heading into the last trading week of the month.  Today I’m going to give you an update on one of the new strategies I have implemented this year.  If you haven’t already read about it then you can get more details in an earlier post here.

Briefly explained, I am testing a short-selling only strategy for stocks trading on the American markets.  It looks to profit from short term down moves lasting from a few days up to a few weeks max.

Downtrends are identified, I then look for brief rallies which become very short-term overbought which I then short sell into.  Profits are taken as soon as prices become oversold.

Identifying overbought and oversold conditions is done by using an oscillator called Relative Strength Index or RSI.


Results To Date:

ZERO.  Nothing to share.  Strangely enough, I have taken no trades what so ever using this strategy since the start of the month!

How Come?

A belief of mine developed from my years of experience trading the markets, is that no strategy can work effectively all the time.  When I say all the time, I refer to main market types.  And when I say main market, I am talking about the S&P 500.

Markets (the S&P 500 in this case) can move up, down or sideways.  But they can also move either quietly or be volatile in any direction.  So you can end up having 6 different market types.

I have traded Oscillator-based strategies similar to RS27 quite extensively and I know how they generally perform in each market type.  Having this knowledge is critical to trading any single strategy effectively in my opinion.

Let me clarify again: No, one strategy will perform well in all market types.

If there is such a holy grail strategy out there, then I have not heard about it!

So if you haven’t already guessed, the markets haven’t been right to trade this strategy.


s&p500 volatility box


What this chart is showing you is the price action of the S&P 500 over the past few months.  The pink lines above and below the price bars, shaded with pink are Bollinger bands.  I use these here to display volatility.  Simply interpreted, the bands get wider with volatility.  I have also drawn rectangular boxes around areas where volatility has dramatically increased.

Areas where volatility increases quickly are not good conditions to trade a strategy like RS27.  Prior to August, oscillator based strategies worked great.


 Why Don’t They Work?

The mechanics of how oscillators work was not the intention of this blog post.  However I will give you a basic explanation:

In quieter less volatile markets price action is orderly.  When prices are in an up trend for example, they move up, become overbought (as shown using Relative Strength Index oscillator) then come back down slightly to value or below and become oversold.  Then buyers step in and prices move up again until they become overbought again.  It’s all nice and orderly.

When the markets become more manic and volatile, the overbought and oversold signals given by Relative Strength Index can become unreliable.

Being able to determine the market conditions that produce reliable and unreliable signals, gives me a much better chance to profit.


When Am I Going To Start Testing RS27 Then?

By keeping a close eye on price action, I assess when conditions are right to begin to trade this new strategy.  Hopefully the markets will quieten down somewhat within the next few weeks and I’ll be able to start to get some trades under way.


So keep checking in to see how this strategy is working out for me.  Thanks for reading and as always you can share this article and connect with me on Facebook or Twitter by clicking on the icons at the top and bottom of this page.

Please share any comments or questions below or email me at jarrod@thetransparenttrader.com.




Featured image by Tudor Barker via Flickr.com


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